There are two main things that traders should identify when trading the forex markets. First, traders should identify the direction of the trade. This pertains to whether the trader should look to buy or sell a certain forex pair. The next question is when the trader should take the buy or sell trade. This pertains to the timing of the trade.
There was a certain article that said that a forex broker company disclosed that most traders would get trade direction right. So, why is it that most traders fail. In fact, they say that about 90% of traders fail and only 10% succeed. This is because although traders get trade direction right, they would often take the trades at the wrong time. It is either that they are too late to the trade or too early. Some take the trade at about the right time but would either exit the trade before it starts to make profits.
So, how do we get to drill down on the correct timing?
The answer still lies in trade direction. It is all about having different indications pointing the same trade direction at the same time. This is called confluence. Confluences are points in the price chart where price has a very high probability of moving in a certain direction because various indications point in the same direction.
Linear Weighted Direction Forex Trading Strategy is a strategy that aligns such directional indications. It generates a trade signal whenever it detects that price is moving in a certain direction using several indicators and momentum is moving with it.
LWMA Crossover Signal
The LWMA Crossover Signal indicator is a technical indicator that produces trend reversal signals based on the Linear Weighted Moving Average (LWMA).
LWMA is a modified moving average calculation which puts more weight on the most recent historical prices. The most recent price is given the highest weight, then the succeeding historical prices are given progressively less weight. This type of computation makes the LWMA very responsive to price changes and reduces lag significantly. In fact, it is more responsive to price movements compared to the Exponential Moving Average (EMA).
The LWMA Crossover Signal indicator provides trend reversal signals whenever its underlying LWMA lines crossover. It conveniently plots an arrow to help traders identify trend reversals more easily.
Oracle Direction Indicator
The Oracle Direction indicator is custom technical indicator which provides information regarding the direction of the trend based on two analysis.
It then plots the indications of the trend direction on two separate rows on its own window. It plots arrows pointing up whenever it detects a bullish bias, an arrow pointing down when it detects a bearish bias, and an “x” mark whenever it does not detect a trend.
This indicator is mainly used as a trend direction filter. The key to using this indicator properly is in taking trades in the direction of the trend only when both rows indicate the same trade direction.
Traders could also use this indicator to exit trades earlier when there are signs that the trend is about to end. These are instances when one of the rows reverse or when an “x” mark is indicated.
Trading Strategy
This trading strategy is a trend following strategy which provides trade setups whenever the Oracle Direction signals and the LWMA Crossover Signal are in confluence, and the corresponding candle is a momentum candle favoring the direction of the trend.
First, we would have to identify the direction of the main trend using the 50-period Exponential Moving Average (EMA). This is based on where price action is in relation to the 50 EMA line, and the slope of the 50 EMA line.
Then, we wait for confluences between the LWMA Crossover Signal and the Oracle Direction.
On the Oracle Direction indicator, the arrows should be pointing the direction of the trend as indicated by the 50 EMA line. Both rows should be plotting the same direction.
The LWMA Crossover Signal indicator will identify the specific entry candle to trade. This will be based on the arrow being plotted by the indicator. The corresponding candle should also be a momentum candle in favor of the trend.
Indicators:
- 50 EMA
- LWMA-Crossover_Signal
- 100pips Trend
Preferred Time Frames: 30-minute, 1-hour, 4-hour and daily charts
Currency Pairs: FX majors, minors and crosses
Trading Sessions: Tokyo, London and New York sessions
Buy Trade Setup
Entry
- Price action should be above the 50 EMA line.
- The 50 EMA line should be sloping up.
- The Oracle Direction indicator should be plotting arrows pointing up on both rows.
- The LWMA Crossover Signal indicator should plot an arrow pointing up.
- The corresponding candle should be a bullish momentum candle.
- Enter a buy order upon confirmation of these conditions.
Stop Loss
- Set the stop loss on the support level below the entry candle.
Exit
- Close the trade as soon as the Oracle Direction indicator plots either an arrow pointing down or an “x” mark.
- Close the trade as soon as the LWMA Crossover Signal indicator plots an arrow pointing down.
Sell Trade Setup
Entry
- Price action should be below the 50 EMA line.
- The 50 EMA line should be sloping down.
- The Oracle Direction indicator should be plotting arrows pointing down on both rows.
- The LWMA Crossover Signal indicator should plot an arrow pointing down.
- The corresponding candle should be a bearish momentum candle.
- Enter a sell order upon confirmation of these conditions.
Stop Loss
- Set the stop loss on the resistance level above the entry candle.
Exit
- Close the trade as soon as the Oracle Direction indicator plots either an arrow pointing up or an “x” mark.
- Close the trade as soon as the LWMA Crossover Signal indicator plots an arrow pointing up.
Conclusion
This trading strategy is a working trading strategy which systematically trades on momentum impulses in line with the trend. It works well enough during trending markets to allow traders to consistently profit from the forex markets.
However, if used in a non-trending market condition, accuracy would also dwindle.
The key to trading this strategy successfully is in identifying if the market condition is trending or not. Traders who could differentiate trending markets and non-trending markets would benefit from this strategy.
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